Innovation is key when an industry is shaping and structuring itself. Of course, it is often a time-consuming process before it makes way for a whole new business paradigm. This is why one might think that innovation is reserved for booming economies that have the potential to invest, research, and finally evolve on a large scale. However, for Africa, one of the standout attributes of the continent is its ability to ‘leapfrog’ inferior and inefficient versions of various technologies.
Let’s take our traditional banking system as an example. There was a shift from bank tellers to Automatic Teller Machines, and from these ATMs to online banking on our personal computers, which ultimately accelerated a shift to digital money.
It takes a gargantuan amount of time, energy, and resources to go from one mainstream adoption to another. It also requires a market that is willing to experiment and consume these new innovations as they are launched and then shifting on to the next new and better thing.
When it comes to developing nations though, they don’t have to pass through these trial and error stages of tech advancements. For example, Kenya has about 37 million mobile phone users, but the number of banks or other basic tech infrastructure such as personal computers pales in comparison.
This is the very reason why there is a unique, scalable opportunity that is turning Africa into the biggest investment pool.
Fintech in Africa: Growth Factors
Africa’s fintech space has experienced phenomenal growth over the past 10 years. According to a report by Crunchbase, there are over 400 active financial technology companies across Africa as of 2020. Out of these, about 80% are home-grown. These fintech firms have recorded a CAGR of 24% in the last decade. This is due to a variety of favourable factors:
- Young and growing populations: As an ecosystem, fintech in Africa ecosystem is flourishing due to suitable demographics that consume the technology that is being launched into the markets.
- Wide-spread mobile phone access: It has been estimated that the number of smartphones in Sub-Saharan Africa will reach an astounding 525 million by 2020.
- Poor financial inclusion: Low levels of financial inclusion in the formal banking systems throughout the entire continent has driven the growth of fintech in Africa, with companies incentivised to tackle this situation and offer solutions.
Diverse Product Offerings
As there is very little financial inclusion in the formal banking system across the continent, payment solution providers dominate the market. However, several segments have the potential to expand significantly in the upcoming years. They are diverse in nature and can be classified into 7 major categories:
This segment dominates the current market scenario due to a large unbanked population, and a subsequent spike in demand for services that trigger and boost financial inclusion. Digital payments are the most active and developed segment and account for about 40% of all the fintech products in Africa.
Ranking second on adoption, lending holds about 24% of the market. Fintech companies offer niche solutions that serve as efficient alternatives compared to traditional banking systems. They use technology for customer profiling, assign and grant loans quickly, and enable repayments more conveniently.
Remittances are one of the most important product offerings on the continent. Low-income workers often turn to this alternative to avoid high transaction costs and the risk of physical transportation.
Investment Technology or Investech companies are growing as they offer attractive financial management services such as managing a customer’s finances based on pre-defined guidelines. They also help investors grow their finances and enable them to invest in equity market instruments such as stocks, index funds, and ETFs.
Insurtech or Insurance technology offers insurance for various categories such as vehicles, health, and even life, in simplified, understandable, and innovative ways. One example is Pineapple in South Africa, a fintech company that provides peer-to-peer insurance solutions, and returns all unused premiums at the end of each year. This makes the offerings of traditional companies pale in comparison, and paves the way for a majority of the population to cherish the added benefits provided by these companies.
Financial exchange platforms are quickly shifting to distributed ledgers, or blockchains, which provide authentic and incorruptible records of transactions. This helps in creating trust between the parties, especially in the absence of a central intermediary. It also eliminates the need for currency exchange during cross-border transactions, and the low transaction costs are only an added bonus!
- Specialised financial technology
These offer specific digital financial solutions for unique markets. Some notable categories include Agritech (Agriculture technology) and Proptech (Property technology).
Fintech in Africa: Success Factors
The African fintech scenario is dominated by four major countries: Egypt, Nigeria, Kenya, and South Africa. Together, these centres are responsible for about 70% of the continent’s fintech activities related to innovation and strategic partnerships. In 2019, these four countries attracted 85% of the total investment capital deployed across Africa. Needless to say, they are the fintech powerhouses of the continent. This is due to a variety of success factors, which are:
- Development of technology that lowers operating costs
- Entering strategic partnerships that are beneficial for native fintech companies
- Constantly innovating products that attract a broad customer base to try out these products
- Integration with central payment systems
What the future holds
Some of the popular trends that are turning fintech in Africa into the world’s biggest investment pool are:
- Widening or upscaling product suite: Due to a large number of smartphone users in the continent, it is becoming easier for fintech companies to collect data that gives them valuable insights. It helps them in coming up with ways for sophisticated consumer profiling, which ensures that their resources are efficiently targeted.
- Expanding geographically: One of the factors providing impressive momentum to the fintech wave in Africa is that more and more Africans are connecting to the internet through smartphones. Companies such as Google are also helping push this internet revolution across the continent.
- Regulatory Oversight: As fintech businesses become more mainstream, regulatory oversight is likely to increase. This is essential for areas such as cybersecurity and consumer protection. Kenya has already passed a series of EU-inspired data protection laws, keeping the concerns around data privacy and ownership in mind.
As the credibility of the industry grows in the upcoming future, appropriate regulations could accelerate growth.
African countries continue to attract considerable interest from investors across the globe, and the upcoming decade shows a lot of promise and potential for the continent’s fintech industry. Lucrative deals in niche markets and untapped sectors, the announcement of new IPOs, and various tech summits in the continent are only some of the things to expect in the upcoming future.